If you'd like to take out a mortgage, don't expect an easy application process. Lenders aren't willing to give out thousands of dollars for a home loan to just anyone. However, while qualifying is difficult it is definitely possible. Here are some strategies that you can use to help up your chances of being approved for a mortgage.
Improve Your Credit Score
Your credit score plays a big role in whether you can qualify for a mortgage. While every lender has different requirements, you typically need a score of at least 650 to qualify for a traditional mortgage, especially if it's your first home loan.
Even if your score is already decent, you should work to improve it before applying because a higher score will lead to a lower interest rate on your loan. Since a mortgage normally involves a very large amount of money, even a small reduction in your interest rate can lead to hundreds in savings on your borrowing costs.
There are several ways to improve your credit score. For starters, you absolutely can't miss any credit card or loan payments before your application. You also should pay down your credit card balances. Finally, avoid applying for any other loans or credit cards before your mortgage application as every extra application reduces your score.
Pay Off Your Debts
Lenders also consider your other outstanding debts when making up their minds about your creditworthiness. They look at the amount of your monthly income that goes towards current loan payments and calculate how that would increase with the extra mortgage payments.
If your debt-to-income ratio is too high, you won't qualify because lenders will worry you aren't earning enough to pay all your loans and live off of at the same time. By paying off one or two debts completely before you apply, you can make yourself look like a better candidate because less of your income is going towards other debts.
Make A Larger Down Payment
Most mortgage loans require that you pay off at least some of the property upfront with a down payment. The standard amount is 20 percent of the total property value but you can pay more or less.
The more you can pay upfront with a down payment, the better your chances of qualifying. Since lenders would be giving you less money for your mortgage loan, they take on less of a risk.
By making a down payment of at least 20 percent, you can also save by avoiding private mortgage insurance. That expensive insurance is obligatory when you take out a mortgage with a down payment of less than 20 percent, unless you get an FHA insured loan.
Saving up for a larger down payment also shows that you are responsible and have what it takes to save money, which makes you look like a reliable candidate for a mortgage.
Work With The FHA Program
The federal government also runs a few programs to help Americans qualify for a mortgage. The most popular is the FHA program. In this program, the government guarantees payment of your mortgage to the bank. As a result, you can qualify for a mortgage with a weaker credit score and a lower down payment, since the bank won't have to worry about not getting paid back.
In exchange for this guarantee, you need to pay an extra fee to the government that is included in your mortgage payments. However, this fee is worthwhile if you can't buy a house on your own.
One other way to improve your chances is to have a friend or family member co-sign your mortgage application. This means they back up your loan with their own credit score as well and agree to be liable for your mortgage payments.
This can be a big help, especially if you don't have much credit history yourself. However if you go this route, you need to be extra careful to make your mortgage payments because missing payments will hurt your co-signer's credit score along with your own.
Don't put off your dream of home ownership any longer. By following this advice, you can qualify for a mortgage even in today's less-than-ideal economic environment.